The consequences of the Durbin Amendment for American consumers

I have just posted a new article co-authored with colleagues from the International Center for Law and Economics, Geoff Manne and Julian Morris, “Price Controls on Payment Card Interchange Fees: The US Experience.”

Here’s the Abstract:

The Durbin Amendment to the Dodd-Frank financial reform legislation capped debit card interchange fees for banks with assets of $10 billion. Credit card and prepaid card interchange fees were not regulated. The cap, which took effect on October 11, 2011, cut the average interchange fee for covered banks from $0.50 to $0.24 per transaction.

The cap reduced annual revenues from interchange fees by between $6 billion and $8 billion. Covered banks have recouped these losses in indirect ways. In particular, they have:

– Reduced the availability of fee-free current accounts. The total number of banks offering free current accounts fell by 50% between 2009 and 2013. In comparison, fee-free banking actually increased at banks not subject to the Durbin Amendment.
– More than doubled the minimum monthly holding required on fee-free current accounts between 2009 and 2012, from around $250 to over $750.
– Doubled average monthly fees on (non-free) current accounts between 2009 and 2013, from around $6 to more than $12.
– These fee increases and loss of access to free checking contributed to an increase in the unbanked population of approximately 1 million people, mainly among low-income families.
– Consumers have shifted their payment usage from debit cards to credit and prepaid cards, which were not subjected to price controls.

Most large retailers have seen significant cost reductions as a result of the Durbin Amendment, yet to date there is no evidence that those cost savings have been passed-through to consumers. Interchange fees have increased for merchants that make small-ticket transactions, as networks have eliminated discounts that they previously received, and smaller merchants have not seen any reduction in their merchant discount rates. Thus, while consumers have seen large and immediate increases in the cost of bank accounts, to date there is no evidence of reduced prices at the pump or checkout. We estimate that as a result of the Durbin Amendment, there will be a transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders, which have been the primary beneficiaries of the Durbin Amendment to date.

Over the next few days I’ll plan to post some highlights from the paper as well.

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